Legal & Regulatory

India Regulatory Brief: Positive Defense Reform, Hiccups for Web-Based Taxis and Medical Devices

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Validity of Defense Industrial License Increased

The government extended the validity of industrial licenses for the defense industry from three to seven years. Further, defense companies can now extend the license for three additional years after the initial period. Industrial licenses are currently required to make items such as armored fighting vehicles, defense aircraft, warships, as well as arms and ammunition. Items that have both military and civilian applications do not require a defense-related industrial license.

The reform means that defense companies now effectively have ten years to begin manufacturing in India – a significant development given the long gestation period for large defense contracts. Department of Industrial Policy and Promotion officials report that the reform is designed to allow companies to focus on manufacturing, not compliance.

India is one of the largest defense importers in the world. The government has subsequently sought to protect and encourage domestic defense manufacturers. The foreign direct investment limit in defense stands at 49 percent, while laws permit foreign portfolio investments of up to 24 percent under the automatic route. Despite this, domestic firms have struggled to develop the capabilities needed to sate India’s defense requirements – the defense ministry recently reported that Indian companies have been unable to fulfill approximately US$ 15 billion in government tenders issued since 2013.

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India Regulatory Brief: Legacy Tax Issues Set for Committee, EPF Amendment Likely

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Legacy Tax Issues Set for New Committee

Finance Minister Arun Jaitley has said that the government will set up a high-level committee to review tax issues. The proposed committee is expected to try to contain the fallout from the Minimum Alternate Tax (MAT) levy on foreign portfolio investors, as well as related court disputes with Vodafone, Nokia and Cairn Energy. In a recent media interview, Jaitley stated that the decision to implement the MAT tax was taken not by the government, but by quasi-judicial bodies created before the government came to power.

Although these issues do not often affect small and medium sized businesses, the MAT controversy, along with other high profile tax disputes, has led many foreign investors to question the business friendly image Narendra Modi’s government has presented. If the proposed committee is created, it will only consider legacy tax cases – tax demands arising from actions that authorities took before the current government came to power. However, Jaitley has ruled out retrospective amendments to tax laws for the benefit of investors, which means that any such changes will have to come in the interpretation of current laws.

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India Regulatory Brief: Medical Devices Park, Simplified Income Tax Return Forthcoming

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India’s First Medical Devices Park Set for Gujarat

The federal government announced plans to set up India’s first industrial park for manufacturing medical devices in Gujarat, Prime Minister Narendra Modi’s home state. The Gujarat state government has earmarked land in Sanand, an automobile manufacturing hub, for medical device manufacturers. The National Institute of Pharmaceutical Education and Research (NIPER), which is based in Ahmedabad, Gujarat, will oversee research and development for the project.

The federal government recently opened the medical device industry up to 100 percent foreign direct investment (FDI). Currently, 71 percent of India’s medical devices and 87 percent of high-end medical devices, including medical electronics and surgical equipment, are imported. However, experts expect this dynamic to change following the FDI reform, and the government’s announcement of plans to provide other infrastructural and financial incentives for the industry.

The creation of the park followed a recommendation from a federal government task force, which was setup earlier this year by the Department of Pharmaceuticals to promote the Make in India campaign. Other recommendations of the task force include enhancing policy and institutional support, strengthening infrastructure and providing tax breaks for the industry. The federal government’s commitment to the industrial park in Gujarat indicates that it will likely follow through on other task force recommendations; government officials report that tax incentives for domestic manufacturers will be unveiled in a phased manner.

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India Regulatory Brief: New Bilateral Investment Treaty, Government Moves to Shorten Environmental Clearance Process

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New Bilateral Investment Treaty to Prevent Arbitration in Certain Disputes

The Indian Finance Ministry has drafted a new bilateral investment protection treaty that will keep tax issues and the issuance of compulsory licenses for intellectual property rights. The new Bilateral Investment Treaty (BIT) is designed to protect foreign investments from unfair treatment and expropriation. However, preventing arbitration calls into doubt just how much additional investor protection will actually be provided.

Cairn Energy Plc. and Vodafone have recently sought arbitration on their tax disputes, so the new treaty changes may be a way for the government to gain leverage in tax disputes by handling them in local courts.

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India Regulatory Brief: Regulations for Internet Applications Taking Shape, Government Moves to Shorten Environmental Clearance Process

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Telecom Authority Plans to Regulate Internet Applications

The Telecom Regulatory Authority of India (TRAI) has issued a consultation paper to help develop a regulatory framework for Internet-based calling and messaging applications. These internet-based applications, known as over-the-top (OTT) services, include Skype, Viber, WhatsApp, Snapchat and Instagram.

The consultation paper, called “Regulatory Framework for Over-the-top Services”, raises questions such as whether Internet based calling and messaging applications should be brought under a licensing regime, and if those service providers should pay for use of traditional providers’ networks.

Local observers have suggested that TRAI may be interested in protecting domestic telecom service providers. Internet-based applications are accessed through telecom services, which allow OTT service providers to compete with traditional telecom’s service offerings. Indian telecoms that offer fixed and mobile telephone networks have often complained about Internet-based services cutting into their Short Message Service (SMS) revenue.

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India Regulatory Brief: Delhi Gov Moves to Block Taxi Apps, Retrospective Amendment Won’t Tax Indirect Transfers

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Delhi Government Asks IT Ministry to Block Taxi Apps

The Delhi government has asked the Ministry of Information Technology to block the mobile taxi apps Uber and Ola. Although the IT Ministry is unlikely to approve the request, the federal government has in the past blocked websites for national security reasons. The Delhi government’s request, however, does show the punitive approach local governments can take against e-commerce companies that violate local regulations.

Following the well-publicized sexual assault case by a Delhi Uber cab driver in December, local government moved with uncharacteristic speed to ban Uber operations. They also stipulated an extensive set of requirements for transport aggregators – newly defined as ‘Radio Taxi’ services – including the installation of panic buttons and around-the-clock helplines.

Despite the transport aggregators’ efforts to comply with these requirements, the Delhi government continues to retaliate against Uber and Ola. It insists that both companies halt operations while their applications under the amended Radio Taxi rules are underway, exacerbating the passenger-safety media storm that continues to tarnish the reputation and revenue of both companies.

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India Regulatory Brief: Gujarat Ahead of Maharashtra in Industrial Investment Survey, Sebi Prepares Guidelines for IPOs

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Economic Survey: Gujarat Ahead of Maharashtra in Industrial Investment Survey

The pre-budget Economic survey clearly identifies Gujarat edging ahead of traditional powerhouse Maharashtra in industrial investment.

Between August 1991 to October 2014, the survey proved that despite Maharashtra attracting a hefty number of investment proposals, execution rates remained under 50 percent. The state’s Special Economic Zone (SEZ) policy, launched in 2006, also produced disappointing results with only 24 SEZs having been executed.

Of the total number of FDI proposals in India, Gujarat’s 12.23 percent share of executed projects edged out Maharashtra’s ten percent. As well as a superior conversion rates, Gujarat also attracts higher value investments than its neighbor Maharashtra.

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India Regulatory Brief: E-Business Continues to Prosper, Parliament Passes Bill to Increase Insurance FDI Cap

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Online Wholesalers Take the Lion’s Share in India E-Business Report

According to an e-business report release by brokerage firm Jefferies India Pvt. Ltd on March 12, 45 percent of India’s online market is now controlled by wholesalers and 35 percent by pure-play online sellers.

The report refers to online portals such as Amazon, SnapDeal and Flipkart, all of which serve as a platform for different types of vendors. Approximately 60 percent of those surveyed reported 100 percent growth in online sales, with another 20 percent showing sales growth between 30 – 100 percent. 

Despite such growth, challenges still remain. The Indian government does not permit foreign direct investment (FDI) in online retail and restricts e-commerce FDI to 51 percent. Although it increased its market size in India in 2014, Amazon still incurred an overall loss in the country. There is therefore still cause for caution in India’s e-commerce market, but this latest report shows that the industry is moving in the right direction.

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